When austerity pays off: fiscal consolidations and public sector efficiency in emerging markets

This paper explores the impact of fiscal consolidations on public sector efficiency in emerging market economies. We examine how efforts to reduce government deficits and debt influence the efficiency of public sector operations. Using the local projections method on a panel of 41 emerging markets from 1997 to 2019, we estimate the dynamic effects of consolidation shocks. Results indicate that expenditure-based consolidations improve public sector efficiency, especially when consolidations are large, occur during downturns, or when initial debt levels are high. Tax-based consolidations show no significant impact. These findings suggest that well-structured expenditure cuts can enhance operational efficiency, making fiscal adjustments more effective. Our paper contributes to the literature on fiscal policy by highlighting the role of consolidation composition in shaping efficiency outcomes. The results provide valuable insights for policymakers designing fiscal strategies in emerging economies, balancing fiscal sustainability with efficient public service delivery.